How Option Companies Are Dealing With the Market Downturn

To read the press reports, stock options have become about as popular as Bill Clinton at a Wall Street Journal editorial conference. Fortunately, the press is wrong. First, they are wrong in assuming that most employees getting options in broad-based plans work (or worked) for dot.com companies or even technology companies, the stock of which has been hit hardest of late; most actually work for large, non-technology companies whose stock price has generally been affected less severely. More important, the press is wrong that companies are abandoning their plans, or even making wholesale changes in them. While that has been our strong impression from all the companies we talk to on a regular basis, we now have firmer evidence of that from a recent email survey of our consultant members who specialize in these plans.

The survey respondents included consultants representing hundreds of broad-based stock option companies, ranging from small high-tech businesses to large multinationals. Most said that none of their clients was currently planning to alter their option plans in response to market declines. Those who said some of their clients were doing something generally pointed to relatively minor changes. The most common was to make additional grants, sometimes to replace existing options that are then canceled. Although it is impossible to provide precise numbers based on the survey, it appears fewer than 10% of the companies overall have done this so far, although many more are considering it. Some companies are accelerating the issuance of options already scheduled to be issued, although, again, this would be a distinct minority. Other strategies are rare, including repricing, issuing new premium priced options, or issuing new options shorter with vesting schedules.

Other data come from a survey of 100 new economy companies by iQuantic, a compensation consulting firm. The survey found that 20 of the companies had changed their plans more than once since the market downturn and 90% planned to do something about stock price declines. Most of the respondents are either accelerating planned options, issuing additional options, or replacing existing options with new options promised six months and one day from the cancellation of the old ones.